ANNUAL REPORT NORWEGIAN INVESTMENT FUND FOR DEVELOPING COUNTRIES

Transcription

1 2015 ANNUAL REPORT NORWEGIAN INVESTMENT FUND FOR DEVELOPING COUNTRIES

2 DIRECTORS' REPORT ANNUAL REPORT 2015 Norfund The Norwegian Investment Fund for Developing Countries was established by the Storting (Norwegian parliament) in 1997 as a state-owned and state-funded invest ment company. Norfund is an instrument in Norwegian development policy. Norfund contributes to economic development and profitable, sustainable jobs in poor countries through the development of profitable enterprises, particularly within the fields of clean energy, the financial sector and agribusiness, coupled with transfer of knowledge and technology. At the end of 2015, the total investment portfolio amounted to NOK 15.1 billion. This report covers both Norfund and the Norfund group. The Norfund group includes consolidation of the subsidiary Norfininvest AS, which is owned 75 per cent by Norfund. Norfininvest AS owns 12.2 per cent of Equity Group Holdings Ltd (Equity Bank), and the company is owned jointly with Norfinance AS. Matters that concern the Norfund group or Norfund individually are specified in the report. Otherwise, the report applies to both companies. 1. SUMMARY OF THE YEAR 2015 was characterised by a global fall in commodity and energy prices and growing economic imbalances in regions in which Norfund is involved. The picture is mixed, but many countries, particularly in southern Africa, are suffering an economic crisis with reduced growth, falling exchange rates and increasing capital flight. Escalating debt and trade deficits and the uncertain global economic situation appear to be reducing investors' willingness to invest in developing countries. In challenging times such as these, Norfund and other development finance institutions (DFIs) have a particularly important part to play in securing access to capital for the private sector. Norfund maintained its high investment level in 2015, with a view to building sustainable companies and combatting poverty. Norfund entered into investment agreements for NOK 2.4 billion in Approximately NOK 328 million was invested in clean energy, while NOK 1.49 billion was invested in financial institutions and NOK 325 million in food and agribusiness. NOK 253 million was invested in SME funds. At 31 December 2015, approximately 49 per cent of Norfund's invest ment portfolio is in clean energy, while 28 per cent of the portfolio is in financial institutions, including micro finance, and 11 per cent is in food and agribusiness. The remainder of the port folio is mainly in small and medium-sized enterprises, through private equity funds. A full 85 per cent of new investments were made in sub-saharan Africa, while 38 per cent were made in LDCs. Investment in renewable energy in 2015 was lower than the owner's expectation that half of the annual supply of capital should be invested in renewable energy. Realized figures for investments made in any one year will vary from year to year. Over time, the investments in renewable energy will exceed the target. In the course of 2015, Norfund revised its strategy. The strategy, which was originally formulated in 2007, was revised in 2009 and 2012, and will be continued along basically the same lines until The strategy has been developed in accordance with the fundamental principles of Norwegian development cooperation policy. It creates a foundation for continued growth of Norfund's total assets during this period, in line with the signals previously emitted by the owner, most recently in White Paper 35 ( ) «Sammen om jobben - næringsutvikling innenfor utviklingssamarbeidet» (Working together business development in development cooperation), and the annual budget documents. The primary features of Norfund's strategy are based on skills-based growth, geographic concentration on eastern and southern Africa, Central America and selected countries in Southeast Asia, prioritising of investment in clean energy, financial institutions, food and agribusiness. Norfund intends to expand its role as an active, strategic minority investor with the emphasis on the use of equity instruments. The Fund will more explicitly define the holding period of each investment. The holding period is determined mainly by Norfund s additional role. Geographical concentration will be continued, but will be somewhat expanded from 2016 to include 2 NORFUND ANNUAL REPORT 2015

3 DIRECTORS' REPORT Ethiopia, Somaliland, and gradual ventures into West Africa. Investment through platform companies such as SN Power, Norwegian Microfinance Initiative (NMI) and Globeleq will play an important part going forward. Norfund's high level of ambition regarding environmental and social standards, and good corporate governance will be maintained. Norfund operates in difficult markets, and has made writedowns on some projects that have led to reduced return in Norfund has continued to focus on investing in fragile states. As a result of the difficult situation in South Sudan, further development of the hydropower plant Fula Rapids has been stopped. Developments in Norfund's other investments in South Sudan are satisfactory. The focus in Myanmar continues to be on microfinance. Norfund has five regional offices: in Maputo, Nairobi and Johannesburg in Africa, Bangkok in Asia and San José in Central America. Norfund's policy is to recruit personnel with local expertise. In 2015, manpower in the regional offices was boosted further. Norfund established a trainee scheme in 2015, and there is now a locally recruited trainee at each of the three regional offices in Africa. 2. NORFUND S BUSINESS 2.1. Activities and business areas Norfund s objective is to contribute to development by investing in viable, profitable enterprises. In this way, Norfund helps to create jobs and income for employees and owners, as well as tax revenues for the authorities. Investments are intended to be additional, by boosting the supply of capital and expertise in poor countries. Norfund is also intended to act as a catalyst by mobilising capital from other investors, both in Norway and abroad. Norfund always invests jointly with other investors, and does not normally contribute more than 35 per cent of a company's equity. In the majority of projects, Norfund's contribution is a combination of capital (equity and/or loans) and the exercise of corporate gover nance. Exercising good corporate governance demands considerable knowledge of countries, sectors, investment skills and, not least, the ability to identify and choose the right partner(s), as well as active follow-up of investments. Norfund receives capital contri butions from the Norwegian government. In 2015, total capital contributions from the government amounted to NOK 1.48 billion. The most important single event in 2015 was the investment in a 12.2 per cent holding in Equity Group Holdings Ltd (Equity Bank), the second biggest bank in Kenya, together with Norfinance AS. Through this investment, Norfund, as a anchor investor in the bank, will contribute to a growth strategy that targets small and medium-sized enterprises and customers who have not previously had access to banking services. Another important event in 2015 was the completion of the investment in the energy company Globeleq, a leading producer of electricity in sub-saharan Africa. The company is owned jointly with the British development finance institution, CDC. The owners' joint target is for Globeleq to develop 5000 MW of new production capacity in the course of the next ten years. Norfund s operations are divided into the following four invest ment areas: Clean energy: Investment in clean energy is intended to improve and increase electricity production from clean energy sources, thereby helping to provide a sound basis for economic development. Projects are characterised by large capital requirements and high risk associated with both the development itself and, for example, hydrological conditions. Norfund s investments in clean energy have been highly profitable over time and generated significant development effects. Norfund entered into agreements for investment in energy for a total value of NOK 328 million in All the agreements concerned renewable energy. Three of the investments were new projects: Rwimi Small Hydro Project is a hydropower plant with a capacity of 6.6 MW in Uganda; Agua Fria is a 59 MW solar power plant in Honduras; and Los Prados a 50 MW solar power plant in Honduras, is a joint venture with Scatec Solar as partner. The latter two investments are being made as part of the collaboration with life insurance company KLP. No less than five power plants began commercial operations in These are the hydropower plants Cheves in Peru, with a capacity of 168 MW, and Bajo Frio, Panama, with 60 MW; the solar power plant Agua Fria in Honduras, with 59 MW, the 53 MW wind farm San Antonia, in Guatemala, and the 4 MW biogas power plant Bio2Watt in South Africa. As from May 2014, the construction of the wind power project Kinangop has been prevented by local civil commotion that caused an unacceptable safety situation at the construction site and the resulting impact of that commotion. Early 2016 the owners notified the Kenyan authorities that by reason of the adverse impact of these events the wind project cannot be completed as planned. Norfund and its partners have as active and responsible owners explored all avenues to find solutions to execute the project, but a solution was not possible for reasons beyond Norfund s control. Financial institutions: Norfund invests in or provides loans to banks, microfinance institutions and other financial institutions. NORFUND ANNUAL REPORT

4 DIRECTORS' REPORT The main aim is to extend the range of financial services to small and medium-sized enterprises (SMEs) and to individuals who would not otherwise have access to such services. Norfund entered into investment agreements in financial institutions totalling approximately NOK 1,489 million in The investment in Equity Bank, Kenya, is an important part of Norfund's strategic work to create efficient, scalable banks that offer reasonable services to small and medium-sized companies and customers who have not previously had access to banking services. Further investment in Norwegian Microfinance Initiative (NMI) was also an important strategic decision in Norfund and the other private owners (Ferd, DNB, Storebrand and KLP) have initiated a dialogue with the Danish Investment Fund for Developing Countries (IFU) with a view to building NMI up into a leading Nordic microfinance platform. In 2015 Norfund increased its commitment to NMI fund III to USD 10 million. An investment agreement for NOK 29.8 million was also closed with the leasing company Arrend Guatemala, which specialises in equipment and machinery for small and medium- sized enterprises, mainly in agribusiness. A further investment agreement has been entered into with Banco Promerica El Salvardor, a bank that targets SMEs. Norfund's investment in fragile states continued in 2015 with investment in two microfinance institutions in Myanmar: Advans MFI Myanmar Company Limited (NOK 10.2 million committed), and Myanmar Finance International Limited (NOK 12.4 million committed). SME funds: SME funds are useful instruments for reaching small and medium-sized enterprises. These enterprises play a key role in building up a well-functioning business sector and creating local jobs. Because of the shortage of capital in the SME sector, Norfund's role is to be additional by investing in these funds. The investments are concentrated on markets with extensive needs, particularly in LDCs and where the supply of capital is particularly weak. Norfund entered into investment agreements worth NOK 253 million with SME funds in Three new investments in funds were carried out in Two of the new investments, the funds Grofin and Business Partner SME Funds, invest in small enterprises in Africa. The third, Laos Cambodia Myanmar Development Fund II, invests in a region with a particular need for capital. Food and agribusiness: The investment area previously called "Industrial Partnerships" is now called "Food and Agribusiness". The change reflects adjustments in Norfund's strategy, the focus of which is on the agriculture sector and related value chain. Norfund's investments in food and agribusiness target new establishments and growth enterprises with major develop ment effects in Africa. In this kind of invest ments, Norfund's expertise and role as an active owner are often just as important as the actual funding. Norfund faced challenges in its agricultural portfolio also in This was not unexpected, however, given the high proportion of newly established companies in challenging markets and demanding forms of production. In 2015, Norfund entered into investment agreements for a total of NOK 325 million in the investment area Food and Agribusiness. A new investment of NOK 84 million was made in the company Freight in Time, a Kenyan logistics company that operates in eight countries in the region and specialises among others in the transport of chilled goods such as vegetables, fruit and flowers to Europe. Follow-up investments were also made in Agrivision Africa, which cultivates wheat, maize and soya and operates a mill that buys grain from small farmers in Zambia, and Africa Century Foods, which is engaged in fishfarming in Zambia and Zimbabwe. The latter investment is associated with the establishment of a company for the manufacture, sale and distribution of fish feed in Zambia, in a joint venture with Nutreco's subsidiary Skretting. The grant facility Norfund has a grant facility that is designed to strengthen the development effects of our investments. The facility provides professional and technical assistance for projects through product development, operational improvements and ESG (environment, social, governance), such as training, improvement of internal control systems or HSE procedures and local community development. In 2015, Norfund administered NOK 26.5 million through its grant facility, NOK 5.5 million of which represented unused resources transferred from Norfund approved grants for a total of NOK 25.3 million, distributed among 20 projects, in Of these grants, 25 per cent went to project development (35 per cent of the resources), 60 per cent went to operational improvement and ESG (53 per cent of the resources) and 15 per cent went to local community development (13 per cent of the resources). The resources were distributed such that 64 per cent went to projects in sub-saharan Africa (70 per cent of the projects) and 37 per cent to projects in least developed countries (LDCs). In addition to 19 new projects, 34 projects from previous years continued in NORFUND ANNUAL REPORT 2015

5 DIRECTORS' REPORT Norfund also administers resources from the Norwegian Ministry of Foreign Affairs/embassies earmarked for the development of a hydropower plant at Fula Rapids, South Sudan, which is now terminated, in addition to risk-reduction measures for our investments in South Sudan and Myanmar. On behalf of the Ministry, Norfund also administers a grant fund earmarked for projects in the Balkans. Most of the resourcess have been granted as loans to two finance companies. Information Office The Information Office for Private Sector Development in Developing Countries is operated in conjunction with the Norwegian Agency for Development Cooperation (Norad) and offers first-line support for enquiries from Norwegian operators interested in making commercial invest ments in developing countries. In particular, the office provides advice and guidance on financial grant and funding schemes to companies. The office received almost 200 enquiries in 2015, mostly from SMEs. Over 60 per cent of the enquiries in 2015 concerned Africa, particularly East Africa. Most of the en quiries concerned Norad's pre-investment phase support schemes, but the office also received a number of enquiries about Norfund's equity and loan instruments Exits In 2015 Norfund exited from five equity investments: AMSCO, a company that delivers professional services to enterprises, the hydropower plant Bugoye in Uganda, and the funds Business Partners Madagascar SME Fund, Locfund and Solidus Investment Fund S.A. Nine loans were also repaid Financial risk In keeping with Norfund's development policy goals, we invest in countries where the operating parameters, markets and companies are characterised by high risk. The future is thus surrounded by a great deal of uncertainty. There is also substantial counterparty risk associated with many of Norfund s investments. Significant credit risk is associated with the loans. Norfund has procedures for assessing risk prior to making investment decisions, and for risk management during the investment period. The risk profile of our portfolio is in accordance with Norfund's mandate. Norfund's investments are largely made in foreign currency: mainly US dollars, but also euros, South African rand and other local currencies. Norfund's results are reported in Norwegian kroner. There is also currency risk associated with individual investments, between Norfund s investment currency and the enterprises cash flows in the local currency. According to our mandate, Norfund should not spend resources on hedging the value of the portfolio in Norwegian kroner, since the resources are to be reinvested outside Norway. Norfund s investment commitments are thus in foreign currency. Disbursements from our reserves in Norwegian kroner often take place long after a contract has been signed, and at an unknown exchange rate. A portion of the investment resources is retained as a buffer in Norges Bank in order to manage this risk. In Norfund s committed portfolio, direct equity investment accounts for 70 per cent, indirect equity investment through funds 15 per cent and loans 15 per cent. A total of 53 per cent is invested in sub-saharan Africa and 29 per cent in LDCs. Excluding investments in Statkraft IH Invest AS, the LDC share is 36 per cent, and 75 per cent is invested in sub-saharan Africa. Market conditions also constitute an important risk factor. Norfund has high exposure to the energy market, and falling energy prices impact profitability, particularly in parts of the portfolio that are exposed to short-term markets. Political and regulatory risk are also important risk factors. Other risk factors are discussed in note 16 to the company's financial statements Social responsibility Norfund has a systematic approach to its social responsibility. The Owner expects Norfund to comply with the requirements stipulated in Storting Report 27 ( ) (A diverse and value-based ownership). Norfund assumes social responsibility by setting high requirements for its own operations and for the operation of enterprises in its portfolio. Norfund has zero tolerance for corruption, and requires that account be taken of human rights, gender equality and local communities as well as the environment and biological diversity. All these factors are thoroughly reviewed before investment agreements are closed; if necessary, action plans are established for the companies' follow-up, and these factors will be in focus in Norfund's active ownership engagement in the companies, and in reporting from the companies in which Norfund has invested. In many of the countries in which Norfund invests, laws and rules to protect employees and the rights of vulnerable groups are poorly implemented. In its investment agreements, Norfund therefore stipulates compliance requirements over and above those that are often general practice and commits the enterprises to compliance with the environmental and social standards of the World Bank's International Finance Corporation (IFC). These standards cover indigenous peoples rights, biodiversity, the interests of local communities and the core conventions of the International Labour Organisation (ILO). Compliance with these standards is an integral part of the work of entering into investment agreements and NORFUND ANNUAL REPORT

6 DIRECTORS' REPORT monitoring the investments as owner and lender. Norfund has established a 'Business Integrity Policy' and reporting procedures that are to be used if financial irregularities or corruption are suspected, and these must be constantly applied in all parts of the organisation. If financial irregularities or corruption are suspected, there is a separate procedure for reporting to the Norwegian Ministry of Foreign Affairs. An important result of the work to promote human rights and anti-corruption in its investments is that Norfund has gained a reputation as an investor that does not tolerate breaches of important principles, and for that reason has become an attractive investment partner. The number of whistleblower cases and incidents related to corruption/business ethics is limited. In 2015, four cases of suspected financial irregularities were reported. Norfund has adopted corporate governance principles, and is operated in accordance with current rules and regulations for public sector financial management. Prevention of financial irregularities forms an integral part of its mandate and operations. Good working conditions for employees are a fundamental goal for Norfund. Ensuring that the enterprises focus on health, safety and the environment (HSE) is a considerable challenge, particularly in major construction projects and in connection with overland transport. Our aim is to ensure that the necessary safety equipment is used and that procedures are followed by all concerned, including subcontractors. Norfund spends considerable amounts on following up on HSE requirements in all our investments. Reporting of serious accidents and deaths is a mandatory contractual requirement. Regrettably, 15 project-related fatalities were reported from enterprises in Norfund's portfolio in 2015, two of them in our direct investments, while 13 were in subsidiaries. One of the deaths was a work-related drowning accident, one occurred in connection with putting out a fire at a forestry place, two were due to violence on the sites of two companies, and the remaining 11 were traffic accidents. Fatal accidents related to Norfund's direct investments are reported immediately to the Board and owner. Norfund follows up all fatalities to ensure that the accidents are investigated, that safety procedures are modified if necessary, and that the next of kin receive the compensation to which they are entitled. Norfund will continue to work to reduce accidents associated with its investments. Norfund always invests jointly with other investors, and often through structures or funds that have been set up by others. In countries with weak legal systems and/or where there is a risk of corruption in the legal system, the administration and enforcement of laws and rules are often neither effective nor predictable. In countries like this, it may be difficult for Norfund and our partners to ensure that legal steps can be taken in the event of financial irregularities or disputes. This represents a risk that is too high for many investors and lenders. The jurisdiction of a third-party country is therefore often employed for investments in weakly developed countries. The use of such offshore financial centres (OFCs) gives Norfund a special responsibility to ensure that we have full insight into the transactions that take place and that we in no way contribute to tax evasion or unlawful flows of capital. In accordance with guidelines issued by the Norwegian Ministry of Foreign Affairs in 2014, Norfund is now subject to the same guidelines as other state-owned companies and funds with international activities. Norfund exercises great caution in its use of OFCs, and follows OECD guidelines on tax- related matters. This includes seeking to avoid using tax havens that do not comply with Global Forum standards on transparency and effective information exchange, and countries that have not entered into tax information agreements with Norway. Norfund integrates consideration for the external environment into its operations and endeavours to follow the guidelines for a 'green government'. The guidelines require that environmental interests form an integral part of its activities, and that a system of environmental management is developed. A few years ago, a survey was therefore made of Norfund's impact on the external environment. As a small, knowledgebased enterprise, Norfund has limited environmental impact. The greatest burden on the environment caused by Norfund s own business activities is due to air travel. In 2015, travel by Norfund's Norway-based employees entailed the emission of some 341 tonnes of CO2. Since 2012, most flights departing from or arriving in the European Economic Area (EEA) have been subject to a mandatory quota through the European quota system. The airlines are thus responsible for emission quotas for this business travel Development effects Norfund's remit is to contribute to the establishment and development of profitable and sustainable enterprises in developing countries. Profitable enterprises are the cornerstone of economic growth and job creation. Companies in Norfund's business areas contribute to job creation in various ways: directly, through appointments, and indirectly by purchasing goods and services from local enterprises. In addition the companies produce electricity and provide financial services important premises for business development and job creation. At the end of 2015, people were employed in activities in which Norfund had invested, directly or through funds. Women accounted for 34 per cent of overall employment. The overall increase from 2014 to 2015 in jobs in companies 6 NORFUND ANNUAL REPORT 2015

7 DIRECTORS' REPORT in which Norfund has invested was 9 per cent. The companies purchased goods and services from local suppliers for NOK 22 billion. The energy companies in Norfund's portfolio produced a total of NOK 18.5 TWh of electricity in This is equivalent to the consumption of 25 million people in the countries in question. Renewable energy sources generated 63 per cent of the electricity, and Norfund's total renewable energy portfolio prevented about 7.4 million tonnes of CO2 emissions in At the end of 2015, financial institutions in which Norfund has invested had issued loans to 36.5 million customers. The microfinance portfolio of Norwegian Microfinance Initiative (NMI) accounted for 31 million of the customers. Agriculture is one of the most important sectors for combatting poverty in Africa. In 2015, Norfund's agribusiness companies cultivated hectares of land, and produced tonnes of food. About small farmers were associated with the enterprises through outgrower or similar arrangements. In 2015, the companies in Norfund's portfolio paid some NOK 8.6 billion in direct and indirect taxes to the governments of the countries in which they operate. Norfund's investment is contingent on stringent environmental and social requirements for enterprises and for projects that would not otherwise be realised. Norfund gives priority to investment in countries and sectors with a particular lack of capital, for example greenfield companies, agriculture and development of clean energy sources. This is challenging, but given a responsible approach, Norfund's activities can yield permanent development effects, and at the same time pave the way for other investors. A review of Norfund's former portfolio companies conducted in 2015 showed that 75 per cent of them are still active. The majority have continued both to grow and to create jobs after relations with Norfund were discontinued. Active ownership is required to ensure that the portfolio companies are operating in accordance with our requirements and expectations. Transfer of expertise is an important part of this work. By maintaining a presence on boards of directors and following projects up closely, Norfund promotes improved management of enterprises, financial procedures, and health, safety and environment systems. This increases the viability of the enterprises and thereby amplifies development effects. Norfund also uses its grant facility to augment development effects. 3. ORGANISATION AND OPERATIONS 3.1. Corporate governance The General Meeting is Norfund's supreme body. Norfund's Board of Directors is elected by the General Meeting. The Board consists of Kristin Clemet (chair), André Støylen, Borghild Holen, Finn Jebsen, Martin Skancke, Brit K. S. Rugland, Nina Elisabeth Hansen and Vegard Benterud. The latter two persons have been elected by and from among Norfund's employees. Norfund s internal control system is based on a structure in which Norfund's governance documents are allocated to different levels, ranging from documents such as the Norfund act and regulations, to specific follow-up procedures. The structure is operationalised and makes inspections, measurement and verification possible Personnel, organisation and gender equality Norfund is an expertise-based organisation which has established guidelines for recruitment, expertise and equal opportunities. There are established procedures for employee follow-up and rewards. Targeted recruitment takes place to enhance the organisation's ability to deliver on the strategy that has been adopted. In 2015, Norfund had 64 full-time positions. At 31 December there were 67 employees, 28 of whom came from countries other than Norway. Twenty-three of the staff were employed at the regional offices in South Africa, Kenya, Mozambique, Costa Rica and Bangkok. The proportion of women who were permanent members of the Board was 50 per cent. Two out of six members of Norfund s management team were women, and the proportion of women among the employees overall was 45 per cent. Four out of ten persons who were engaged in 2015 were women. Norfund is concerned with gender equality in its human resources policy, and urges women and persons of non-norwegian origin to apply for positions. Sickness absence in 2015 amounted to two per cent of total working hours, equivalent to 300 days. This is approximately 0.3 per cent higher than in There were no personal injuries or damage to Norfund s property. The Board of Directors does not find it necessary to implement any special measures relating to the working environment or designed to promote the aims of the Anti-Discrimination Act and the Anti-Discrimination and Accessibility Act. There are no employees in the Norfund group other than those mentioned in the information provided above about Norfund. NORFUND ANNUAL REPORT

8 DIRECTORS' REPORT 4. THE FINANCIAL STATEMENTS Norfund is an investment company, so its operating income consists of interest, dividends and gains on sales. For traditional production enterprises, these are classified as financial items. Similarly, investment in associated companies is a part of operations, and Norfund's share of the profits of associated companies is therefore recorded as operating income. The Norfund group includes consolidation of Norfinvest AS, of which Norfund owns 87.5 per cent: 75 directly, and per cent indirectly through Norfinance AS, which owns 25 per cent of Norfininvest AS. Comments to the annual accounts of the Norfund group are to be found in a separate section. Norfund had a profit for 2015 of NOK 426 million (NOK 598 million in 2014). Norfund s income amounted to NOK 340 million (NOK 462 million in 2014). Interest income of NOK 178 million represented an increase of NOK 32 million compared with Dividends from funds and equity investments amounted to NOK 87 million, approximately the same level as in The profit from associated companies of NOK 66 million includes the profit from Norfund's 50 per cent share in SN Power AS, NOK 165 million. The profit for 2014 included 40 per cent share of Statkraft Norfund Power Invest AS until the reorganisation of the company on 1 June 2014, and thereafter 50 per cent of the newly established SN Power AS. The total taken to income of the profit share in 2014 for Statkraft Norfund Power Invest AS/SN Power AS was NOK 183 million. In addition, holdings from KLP Norfund Investments AS, Norfinance AS and Norfininvest AS were taken to income; see Note 5 in the annual accounts. Norfund s operating costs prior to exchange rate adjustment of loans and write-downs increased by NOK 33 million, to NOK 173 million, in This is due to higher personnel expenses, which increased by NOK 8 million as a result of higher staff numbers and higher expenses attributable to external assistance associated with the company's investments. A strengthening of the investment currencies relative to the Norwegian krone has resulted in a positive currency adjustment on our loans of NOK 233 million, compared with a gain of NOK 315 million in Large write-downs were made on five investments in 2015, and investments were written down by a total of NOK 139 million in Other interest income amounted to NOK 15 million, a reduction of NOK 17 million. This was attributable to lower bank deposits as a consequence of higher payments for investments and lower return on bank deposits. Other interest income of NOK 161 million is largely attributable to gains on exchange on the company's FX bank deposits as a result of the strengthening of currencies, primarily of USD, against NOK. Norfund's profit of NOK 426 million has been transferred to Norfund's surplus fund in accordance with the regulations governing Norfund. Norfund s internal valuations indicate that there is still considerable excess value in the portfolio over and above the carrying values. Norfund's balance sheet at the end of 2015 was NOK million (compared with NOK million for the previous year), an increase of NOK million. The change in the balance sheet is essentially due to the transfer of NOK million from Norfund's owner, a surplus generated by operations and an increase of NOK 503 million as a result of an equity adjustment of Norfund's owner ship share in SN Power due to the US dollar appreciating relative to the Norwegian krone. At year-end, Norfund's equity amounted to NOK million (compared with NOK million in 2014) and NOK million had been disbursed for investments (compared with NOK million in 2014). Norfund has no interest-bearing debt. Norfund disbursed a total of NOK million to its investments, and received NOK 866 million from its investments in The Board regards the company's liquidity as satisfactory. Write-downs were made on 10 out of 65 loans as at 31 December The write-downs represented five per cent of the committed amount. Norfund group had a profit for 2015 of NOK 474 million (NOK 598 million in 2014). The Norfund group s income amounted to NOK 431 million (NOK 462 million in 2014). Group income consides with Norfund's income with the exception of profits for associated companies. The profit share from Norfininvest AS is not included, as this company's profit is consolidated with that of the Norfund group. The Norfund's group's operating costs of NOK 176 million in 2015 include NOK 3 million of accrued costs for Norfininvest AS. The group's financial result of NOK 133 milion is affected by exchange loss on Norfininvest's USD bank holdings prior to disbursement for the investment in Equity Bank Ltd. Norfund has no special research or development activities of significance for the accounts. There have been no significant events since balance sheet date with an actual or potential effect on the results or financial standing. In the opinion of the Board, the annual accounts at 31 December 2015 provide a true and fair view of the company s financial position. The Board confirms that the going concern assumption applies. 5. NET ASSET VALUE AND RETURN The net asset value is an estimate of Norfund's total market value. As Norfund's investments are mainly non-liquid positions in demanding markets with high risk, there is substantial uncertainty associated with estimates of net asset 8 NORFUND ANNUAL REPORT 2015

9 DIRECTORS' REPORT value. The estimates are based on the carrying values of the individual investments, and are adjusted for increase or decrease in value on the basis of the valuation principles of the European Venture Capital Association (EVCA). Where there are relevant transaction values, these should as a general rule form the basis, but in most cases the estimated value is based on discounted future cash flows. Such valuations are subjective, and the fair values will only emerge on exiting from the investments. The net asset value at 31 December 2015 was NOK million, compared with NOK million at the end of the Norfund's objective is to create profitable enterprises in poor countries. Whereas most other Norwegian investors invest with a view to later repatriating the returns to Norway, our money is to be reinvested in poor countries. Consequently, we measure the return on investments in the investment currency, not in NOK. This is also the manner employed by co-investors for whom the investment currency is their functional currency. For our Norwegian co-investors, the return in Norwegian kroner will be more relevant. Of Norfund's total investments, around 76 per cent are denominated in USD, the remainder in other currencies. The Norwegian krone depreciated substantially against the US dollar through This has a strong impact on the accounting results, the portfolio evaluations and the return calculated in NOK versus USD. The return on the investment portfolio, expressed in the invest ment currencies, is calculated to be 5.4 per cent p.a.. The return is calculated from the time of making the investments. The return calculated in Norwegian kroner is 10.5 per cent p.a.. In 2015, the return in investment currencies was 3.5 per cent, and in Norwegian kroner 18.7 per cent. The explanation for the relatively weak 2015 figures calculated in investment currency is partly attributable to a limited number of projects, continued low energy prices in some markets, and challenges in some agribusiness investments. 6. OUTLOOK FOR THE FUTURE The new sustainability goals adopted by the UN in 2015 under score the crucial importance of the business sector for economic growth and for combatting poverty. The business sector is the most important contributor to income, jobs and tax revenue in the majority of developing countries. White Paper 35 ( ) «Sammen om jobben - næringsutvikling innenfor utviklingssamarbeidet» (Working together business development in development cooperation), the Norwegian Government signalled a strong and strategically oriented effort for business development in developing countries. The White Paper gave notice of increased grants for investment through Norfund. Profitability is a prerequisite for creating sustainable enterprises, and for generating capital that can be reinvested. In order to increase commercial investors' interest in investing in poor countries, it is also important to be able to demonstrate solid financial results. Over time, Norfund has built a substantial portfolio of investments that are both profitable and sustainable, and an organisation with the capacity to carry out new and follow up existing investments on a substantial scale. This past year has been characterised by falling commodity prices and global investors have withdrawn a large amount of capital from emerging economies. This has increased the challenges, which include falling exchange rates, faced by many of the countries in which Norfund invests. Southern Africa is particularly hard hit. A number of investments will face greater challenges, and the risk in the portfolio will increase. At the same time, there is a large shortage of investment capital, particularly for the most demanding projects in poor countries. Developing finance institutions such as Norfund have a particularly important part to play in this situation. With its new strategy, Norfund is equipped to further develop its portfolio and play a key role in business development, job creation, and the development of a climatefriendly energy supply for poor countries. Norfund has for many years sought close collaboration with other investors in selected areas in which their partners possess specialised expertise and can contribute to better goal achievement. In the years ahead, a growing share of Norfund's investment will take place through platforms and strategic cooperation with partners. Some important platforms are the restructured SN Power for hydropower investments, collaboration with British CDC through Globeleq Africa Ltd, which encompasses solar, wind and gas power, and Norwegian Microfinance Initiative (NMI) for investments in micro finance. Norfund will strive to develop NMI into a leading Nordic player in microfinance. Strategic collaboration with Scatec Solar for investment in solar power, with KLP on invest ment in financial institutions and renewable energy, and with Norwegian financial investors through Norfinance AS will also be important foundations for future investments. Norfund will therefore continue efforts to mobilise more capital, in collaboration with other partners. Expertise is the key to success in establishing and following up good investment projects that yield substantial development effects. Norfund has worked systematically over time to build up an organisation with expertise in investing in NORFUND ANNUAL REPORT

10 DIRECTORS' REPORT poor countries. Today, Norfund is an attractive employer and an attractive investment partner for Norwegian and international investors. Norfund has zero tolerance for corruption, and works systematically to identify and limit risk related to failure to comply with rules and procedures, integrity and corruption. Norfund will continue to prioritise investments that yield substantial development effects. This requires giving priority to investment in energy production, food and agribusiness, as well as financial institutions especially financial institutions that finance small and medium-sized enterprises and low income groups, including microfinance). The primary investment instruments will be equity and similar instruments. Norfund will maintain its high level of ambition with regard to environmental and social standards, as well as sound management of enterprises. This includes the requirement in all our investments that the IFC Performance Standards be met. Norfund will assist our companies in the work of satisfying these requirements. Our grant facilities enable us to assist in strengthening internal control systems or improved HSE procedures. Our ambitions with regard to maximising, measuring and documenting the development effects of investments will be raised further. In particular, we will place emphasis on achieving Norfund's strategic goals: to prioritise the least developed countries (LDCs), sub-saharan Africa, greenfield start-ups, and to ensure additionality and mobilise private capital. Norfund has already completed investment projects in fragile states such as Myanmar and South Sudan, and will continue its efforts to develop new instruments and working methods appropriate to the conditions in these countries. In keeping with Norfund's strategy, the Fund invests today in Central America, selected countries in South-East Asia, Southern Africa and East Africa. The East African venture is being expanded in 2016 to include Ethiopia and Somaliland, and Norfund will gradually also begin to invest in West Africa, from its basis in a new regional office that it is planned established in Ghana. Oslo, 30 March 2016 Kristin Clemet Chair André Støylen Borghild Holen Britt K.S. Rugland Martin Skancke Finn Marum Jebsen Vegard Benterud Kjell Roland Managing Director Nina Elisabeth Hansen 10 NORFUND ANNUAL REPORT 2015

11 ANNUAL ACCOUNTS PROFIT AND LOSS ACCOUNT Norfund Norfund group (Figures in 1000s of NOK) Note Interest income loans - invested portfolio Realised gain on shares Dividends received Other operating income Share of profit associated company Total operating income OPERATING EXPENSES Payroll expenses Depreciation tangible fixed assets Other operating expenses 2, Total operating expenses prior to exchange rate adjustment of loans and write-downs, investment projects Adjustment for gain/loss on FX, project loans Write-down investment projects (-) / reversals (+) Profit/loss on operations Other interest income Other financial income Other financial expenses Net financial items Profit/loss before tax Tax PROFIT/LOSS FOR THE YEAR TRANSFERS Transferred to surplus fund Majority interest Minority interest TOTAL ALLOCATIONS NORFUND ANNUAL REPORT

12 ANNUAL ACCOUNTS BALANCE SHEET Norfund Norfund group (Figures in 1000s of NOK) Note ASSETS Fixed assets Tangible fixed assets Operating equipment, fittings and fixtures, tools etc Total tangible fixed assets Financial fixed assets Investments in associated company Total financial fixed assets Total fixed assets Current assets Receivables Other receivables Total receivables Investments Capitalised project development costs Loans to investment projects 1, Equity investments 1, Total investments Bank deposits, cash and cash equivalents Bank deposits Total bank deposits, cash and cash equivalents Total current assets TOTAL ASSETS NORFUND ANNUAL REPORT 2015

13 ANNUAL ACCOUNTS BALANCE SHEET Norfund Norfund group (Figures in 1000s of NOK) Note EQUITY AND LIABILITIES Equity Called and fully paid capital Primary capital Reserve capital Total called and fully paid capital Retained earnings Surplus fund Total retained earnings Minority interest TOTAL EQUITY Liabilities Provision for liabilities and charges Pension commitments Total provisions for liabilities Current liabilities Accounts payable Unpaid government charges and special taxes Unused funds (grant facility) Other current liabilities Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES Oslo, 30 March 2016 Kristin Clemet Chair André Støylen Borghild Holen Britt K.S. Rugland Martin Skancke Finn Marum Jebsen Vegard Benterud Kjell Roland Managing Director Nina Elisabeth Hansen NORFUND ANNUAL REPORT

14 CASH FLOW STATEMENT CASH FLOW STATEMENT Norfund Norfund group (Figures in 1000s of NOK) Note CASH FLOWS FROM OPERATIONS Profit before tax Ordinary depreciation Reversal of write-down (-) / Write-down investment projects Differences in pension costs and receipts/disbursements, pension scheme Share of profit, associated company Effect of exchange rate changes Change in other accruals Net cash flow from operations CASH FLOWS FROM INVESTMENT ACTIVITIES Investments in tangible fixed assets Proceeds of sales/repayment of shares/holdings recorded at cost price Disbursements in connection with purchase of shares/ interests in other enterprises Disbursements of investment loans Repayment of principal, investment loans Repayment other investments Net cash flow from investment activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new short-term debt Disbursements - repayment of long-term debt Disbursements - repayment of short-term debt Increase in/repayment of equity Net cash flow from financing activities EXCHANGE RATE CHANGES, CASH AND CASH EQUIVALENTS Net change in cash and cash equivalents Bank deposits, cash and cash equivalents at 1 January Bank deposits, cash and cash equivalents at 31 December NORFUND ANNUAL REPORT 2015

15 ACCOUNTING PRINCIPLES ACCOUNTING PRINCIPLES The financial statements for NORFUND/THE NORFUND GROUP consist of the following: Profit and loss account Balance sheet Cash flow statement Notes The financial statements are prepared by the Board of Directors and the executive management of Norfund, and must be read in conjunction with the directors report and the auditor s report. Special matters that concern the Norfund group or Norfund individually are specified in the notes. Otherwise, the notes apply to both companies. BASIC PRINCIPLES ASSESSMENT AND CLASSIFICATION The financial statements are presented in compliance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles in effect at 31 December The financial statements provide a true and fair view of assets and liabilities, financial standing and profit. The financial statements have been prepared on the basis of fundamental principles governing historical cost accounting, comparability, the going concern assumption, congruence and prudence. Transactions are recorded at their value at the time of the transaction. Revenue is recognised when it accrues and expenses are matched with the related revenue. A more detailed account of the accounting principles is provided below. When actual figures are not available at the time the accounts are closed, generally accepted accounting principles require management to make the best possible estimate for use in the profit and loss account and the balance sheet. Actual results could differ from these estimates. Current assets/liabilities are recorded at the lower/higher of acquisition cost and fair value. The definition of fair value is the estimated future sales price reduced by expected sales costs. Other assets are classified as fixed assets. Fixed assets are entered in the accounts at historical cost, with deductions for depreciation. In the event of a decline in value that is not temporary, the fixed asset will be subject to a write-down. Investments are valued in accordance with IPEV s valuation guidelines. Some exceptions are made from the general valuation rules in accordance with generally accepted accounting principles. Comments to these exceptions can be found in the notes to the accounts. When applying the basic accounting principles and disclosure of transactions and other items, the substance over form rule is applied. Contingent losses that are probable and quantifiable are expensed. The segmentation is based on Norfund s internal management and reporting requirements as well as on risk and earnings. Figures are presented for geographical markets, since the geographical division of activities is of material importance to the users of the financial statements. Figures are reconciled with the institution s profit and loss account and balance sheet. THE MOST IMPORTANT ACCOUNTING PRINCIPLES USED BY NORFUND ARE DESCRIBED BELOW. Principles for revenue recognition Operating income includes dividends, gain on the sale of shares/ownership interests in other companies, interest on loans made to other companies, directors fees, other project income, gain on the sale of fixed assets, and payments of interest and principal on the loan portfolio. Gains on the sale of shares/ownership interests in other companies are recorded in the year in which the sale takes place. Gains from funds are recorded as dividend. Interest is recorded as and when it is earned. Other proceeds from shares/ ownership interests are deducted from the book value, and are accordingly not recorded as income. Payments from the investment portfolio are recorded when received (the cash principle). When loans to development projects are classified as problem loans, interest is recorded to income on the basis of the written-down value. Interest recorded but not paid owing to default is reversed. Financial income and expenses Interest on Norfund s liquidity reserve in Norges Bank and other Norwegian banks is recorded as financial income. The profit or loss on matured forward contracts for portfolio hedging purposes is recorded in its entirety against other financial income or other financial expenses. NORFUND ANNUAL REPORT

16 ACCOUNTING PRINCIPLES Project development expenses Development expenses are entered on the balance sheet when it is probable that they will lead to future investments and a positive return on the investment. Determining such probabilities entails using judgement based on experience and best estimate of future developments. In view of Norfund's invest ment strategy and geographical investment areas, there is a high degree of uncertainty associated with expectations of future developments. In an early phase of project development, some of the costs will be expensed continuously. Associated company Associated companies are enterprises in which Norfund has substantial influence, but are not subsidiaries or joint ventures. Associated companies are incorporated in the accounts according to the equity method. Norfund s share of income from associated companies is incorporated as a separate item in the profit and loss account. Similarly, equity investments are presented as a separate item on the asset side of the balance sheet. Investments in SN Power AS, Norfinance AS and KLP Norfund Investments AS are recorded as associated companies in accordance with generally accepted accounting practice. Where final figures are unavailable, estimates of the expected result are used. Equity investments Norfund normally treats its investments in other companies as current assets. In other words, the equity method is not used, even though Norfund s equity interests provide it with considerable influence. This is because the purpose of the institution s investments is to dispose of all or part of each invest ment, normally after three to 10 years. This is in accordance with Norfund s objects and with the provisions of the Norwegian Accounting Act and generally accepted accounting practice. According to generally accepted accounting practice, such investments are temporary by their very nature and should therefore be in cluded under current assets. Equity investments in companies are valued at the lower of cost or market value, on the basis of a specific assessment of each investment, such that each investment is written down where this is considered necessary because of a fall in value regarded as permanent (individually assessed write-downs). No group write-downs are made. See also the section below relating to the treatment of currency items. When investments are exited wholly or in part, the gain/ loss is calculated on the basis of the historical cost in NOK. This makes realisations a function of changes in exchange rates and the change in the value of the investment expressed in foreign currency. Committed investments implies an external obligation for a specified amount. Norfund often utilises various instruments such as options, conversion options and so forth in investment agreements in order to reduce risk. These are taken into account when valuing the individual investment. Consolidation The consolidated accounts include Norfininvest AS, in which Norfund owns 75 per cent and Norfinance AS owns 25 per cent. Norfund owns 49.8 per cent of Norfinance AS, and thereby indirectly owns a further 12.4 per cent of Norfininvest AS. A controlling interest is normally achieved when the group owns more than 50 per cent of the shares in the company, and the group is able to exercise practical control of the company. Minority interests are included in the group s equity. Transactions and inter-company accounts within the group have been eliminated. The consolidated accounts have been prepared according to uniform principles, in that the subsidiary complies with the same accounting principles as the parent company. The acquisition method is used in the accounting of mergers. Loans Norfund manages two types of loans: loans relating to Norfund s investments and disbursed by Norfund (project loans) loans to enterprises in developing countries, taken over from Norad (loan portfolio). Project loans are treated as current assets. Loans are carried at amortised cost in accordance with a straight-line allocation method. In accordance with the institution s strategy, the loan portfolio acquired from Norad is classified as a current asset and recorded in the accounts at historical cost, which is NOK 0. Receipts from the loan scheme are therefore treated on a cash basis and recorded as income when they are paid. Known losses Losses as result of insolvency, the winding-up of a company or similar events, and losses on the sale of shares, are recorded as recognised losses. Currency items Monetary items are recorded at the exchange rate prevailing on 31 December. Unrealised foreign exchange gains/losses on loans are included in the operating profit. Unrealised gains / losses on other monetary items are recorded as financial income/expenses respectively. The assessment of changes in the value of investments (see above) also includes an assessment of changes caused by exchange rate movements. Norfund has not hedged its invested portfolio by means 16 NORFUND ANNUAL REPORT 2015

17 ACCOUNTING PRINCIPLES of hedging instruments. However, it has accepted that SN Power AS utilises hedge accounting for its portfolio. Gains and losses on hedging that are carried as part of the investment are charged to the company's equity as long as the hedging instrument is effective. In connection with exiting from the investment, the aggregate value of gains/losses will be taken to income together with currency translation differences for the investment. For further details, see the annual report for SN Power AS. Bank deposits, cash and cash equivalents Liquid assets consist of bank deposits. Current receivables Current receivables are recorded at their estimated value and adjusted for irrecoverable items. Tangible fixed assets Tangible fixed assets are entered at cost price reduced by commercial depreciation on the basis of the estimated economic life of the asset in question. Leases Rent paid under leases that are not booked in the balance sheet are treated as an operating cost and allocated systematically over the whole term of the lease. Equity Norfund s equity is divided into primary, reserve and surplus capital. This breakdown is made on the basis of the framework conditions for Norfund s activities, which specify that the Ministry of Foreign Affairs must be notified if the institution s losses are so great that its primary capital is affected. Any net profit is added to surplus capital, while any net losses are deducted from this or from reserve capital if the former fund is insufficient to cover the net loss. Cash flow statement The cash flow statement is compiled using the indirect method. Pension liability and costs Norfund has pension plans known as defined benefit plans which entitle employees in Norway to defined future benefits. Pension liabilities are calculated on a straight-line earnings basis, taking into account assumptions regarding the number of years of employment, discount rate, future return on plan assets, future changes in pay, pensions and the size of National Insurance benefits, and actuarial assumptions regarding mortality, voluntary retirement etc. Plan assets are stated at fair market value. Net pension liability comprises the gross pension liability less the fair value of plan assets. Net pension liabilities from underfunded pension schemes are included in the balance sheet as a provision, while net plan assets in overfunded schemes are included as long-term interest-free receivables if it is likely that the overfunding can be utilised. Employer's social insurance contribution is made on the basis of net plan assets. The effect of changes in pension plans with retroactive effect not conditional on future earnings is defined as an actuarial gain or loss and charged directly to the company's equity. Net pension costs, which consist of gross pension costs less estimated return on plan assets, are classified as an ordinary operating cost and presented as part of the payroll expenses item. All actuarial gains or losses are charged directly to the company's equity. Employer's social insurance contribution is calculated on contributions paid to the pension plans. The company has pension plans for employees at regional offices outside Norway, mainly defined contribution plans. Government grants Norfund receives government grants which are treated in accordance with Norwegian Accounting Standard (NRS) 4. In Norfund s view, net recording of government grants received by the institution provides the best picture of the accounts. Related parties Norfund defines SN Power AS, Norfinance AS, Norfininvest AS and KLP Norfund Investments AS as related parties. Deferred tax and tax expense Norfund is exempt from tax pursuant to a separate section in the Taxation Act. In certain countries, Norfund is obliged to pay withholding tax on interest and dividends. NORFUND ANNUAL REPORT

18 NOTES NOTE NOTE 1 - SEGMENT INFORMATION SEGMENT INFORMATION BY BUSINESS AREA The table below presents an overview of the results of Norfund's investment departments, the loan portfolio taken over from Norad (see note 6), shared functions and other activities. The costs of shared functions have largely been allocated in accordance with the number of employees in each area, and are recorded as part of other operating expenses (Figures in 1000s of NOK) NORFUND total SME Funds Financial Institutions Clean Energy Food & Agribusiness Shared functions Other activity Loan portfolio* OPERATING INCOME Interest - invested portfolio Realised gains Dividends received Other project revenues Profit from associated companies Total operating income OPERATING EXPENSES Payroll expenses Depreciation of tangible fixed assets Loss on sale of operating assets Other operating expenses Allocation of shared expenses Total operating expenses Adjustments for gain/loss on FX Provision for (-)/reversal of loss on projects Profit/loss on operations Net financial items** Profit/loss before tax Tax Profit/loss for the year Group account effects Total Norfund group * Income is directly attributable. Expenses are partly directly attributable and partly shared costs allocated in accordance with distribution formulae based on the number of people employed. ** Financial items include considerable gain/loss on FX bank deposits. Other activities include the Information Office for Private Sector Development in Developing Countries and the tender guarantee scheme. 18 NORFUND ANNUAL REPORT 2015

19 NOTES 2014 NORFUND total SME Funds Financial Institutions Clean Energy Food & Agribusiness Shared functions Other activity Loan portfolio* NORFUND ANNUAL REPORT

20 NOTES SEGMENT INFORMATION BY GEOGRAPHICAL REGION: 2015 (Figures in 1000s of NOK) Africa Asia Latin- America Global Writedowns Total BALANCE SHEET Equity investments Loans to investments Total balance sheet Group account effects Total Norfund group Interest income loans Realised gain on shares Dividends received Directors' fees received Fees Repayments of principal, loan portfolio Interest paid on loan portfolio Share of profit/loss, associated company Total operating income Group account effects Total Norfund group Adjustments for gain/loss on FX NOTE 2 - PAYROLL EXPENSES WAGES, SALARIES AND OTHER PAYROLL EXPENSES (Figures in 1000s of NOK) Wages and salaries Directors' fees Employer's social insurance contribution Personnel insurance Pension expenses Other benefits Payroll expenses reimbursed Total wages, salaries and other payroll expenses NORFUND ANNUAL REPORT 2015